Tag: NBFC

L&T Finance Holdings – IPO – Invest

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Price band 51-59 ; Issue period Retail – July 27 – 29, 2011.        

(For a detailed note on L&T Finance Holdings IPO with analysis, business charts and IPO risks, subscribe for free to this blog, on the right panel)

Update on July 28th

  • On the second last day, the IPO has already been subscribed 1.21 times, with breakup of QIB (0.72), HNI (0.5), Retail (2.21), Employees (0.51) and Shareholders (0.96).
  • Retail has the highest oversubscription till now !! This is a new phenomenon. Looks like QIB’s are worried about USA’s debt problems, and a dull Sensex with an Interest Rate increase over last 2 days has affected overall demand.
  • The investment limit for Retail is Rs 2,00,000. If you want to maximise your subscription, bid for 3300 (33X100 lot size) shares at Cut Off for an investment of Rs 1,94,700.
  • Good luck !!

Report on July 25th

L&T Finance Holdings is a high quality NBFC offering. Buy with a 2-3 year investment perspective.

L&T Finance Holdings – Description and Profile

  • This is the first public issue from the house of L&T since the parent’s listing way back in 1950
  • L&T FH is the holding company for the financial services business of the L&T Group. L&T FH has four arms that manage the mutual fund, asset financing, infrastructure financing and working capital funding businesses. This includes firms like L&T Infrastructure Finance, L&T Finance, India Infrastructure Developers, L&T Investment Management and L&T Mutual Fund Trustees.
  • L&T FH plans to mobilize Rs 1,245 crore, for a 14.2% dilution (17% total dilution including pre – IPO placement), valuing the firm at Rs 8,700 – 9900 crores.

L&T – Snapshot

  • L&T is a proxy for infrastructure, machinery and construction in India. The recent aggression and focus on core competence by management in the last decade has yielded results – of excellent growth and profits.
  • Over the last 10 years, L&T share has shown results:

–          Share price increased 48% CAGR

–          EPS has increased 31% CAGR

My conclusion is that L&T has rewarded shareholders over the years,  grown consistently and transparently, and built a good reputation. And this rubs off very positively on L&T FH.

L&T FH Financials

  • At Rs 59 (upper end of the price band), the L&T FH valuations are at 2.2 times the consolidated FY-11 book
  • The capital adequacy of L&T Finance and L&T Infrastructure Finance is 16.5 per cent.
  • Business Assets of L&T F and L&T IF combined are 11,491 crores as of Mar 2010; Assets have grown at 77% CAGR over the last 5 years
  • Combined PAT is 267 crores in Mar 2010; PAT has grown 62% in last 5 years
  • These high growth rates are expected to continue for many years, as Infrastructure spending in India is on the upswing.
  • Another attractive investment in this space is Yes Bank, see the report

IPO Offer:

  • The IPO price band is 51-59 per share; Issue period for Retail is July 27-29, 2011.
  • Investor categories includes – interestingly – Shareholders, in addition to the usual QIB, NII (HNI), Retail and Employees. Shareholders can decide if they wish to bid for shares under shareholder quota or Retail/HNI, as multiple bids may be rejected.
  • The purpose of the IPO is:
  • Retire Rs 345 crore of inter-corporate deposits. The inter-corporate deposit was taken from L&T to support the capital needs of its subsidiaries last fiscal.
  • To support capital adequacy ratio of its subsidiaries. Around Rs 570 crore would go to L&T Finance,and Rs 535 crore would be used for augmenting capital of L&T Infrastructure Finance.
  • P/E at upper end may be around 21 times.  The IPO has been rated – IPO GRADE 5 by the Agencies – CARE and ICRA, indicating superior fundamentals

Opinion, Outlook and Recommendation

  • All the large Capital Goods and Infrastructure firms worldwide have created finance arms/ tie-ups to bundle their product with financing. This provides a good synergy as the product is capital intensive e.g. GE Capital, Airbus and Boeing financial arms, etc.
  • The L&T Finance business will be better valued as an independent company, rather than as a mere subsidiary
  • L&T FH is well diversified as a firm, and is present in the high growth areas of Infrastructure financing and Rural development
  • The prospects for L&T are good over the next decade. L&T FH has strong synergies with the parent firm, and by independent listing, will be able to manage it’s capital needs and growth better
  • Invest with a 2-3 year horizon.
  • Check back on this website www.jainmatrix.com for updates

Do you find this report useful? Please comment below. For a detailed note on L&T Finance Holdings IPO with analysis, business charts and IPO risks, subscribe for free to this blog, on the top of the right panel

Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Also see: https://jainmatrix.wordpress.com/disclaimer/

Sparkling Power Finance Corp FPO – May 10-13

6 Comments

Update on late May 12th!

  • PFC FPO got over subscribed 3.6 times on Thursday.
  • While the FII portion was subscribed a healthy 6.9 times, the HNI (0.01 times) and Retail (0.34 times) subscribers are waiting for the last day. This indicates a likely surge tomorrow in the latter two categories.
  • The maximum subscription amount for Retail is Rs 2,00,000. For Retail, if you want to maximise your subscription, bid for 1064 (28X38) shares at Cut Off (could be as low as 183.35) for an investment of Rs 1,95,084
  • Good luck !!

FPO Note – May 10th

Power Finance Corp is a power sector PSU available at attractive valuations. Demand in the sector remains robust. Subscribe to the FPO.

Power Demand:

  • The Indian power generation sector faces huge demand growth. See graph (we are in 11th Plan now)
  • Plan vs Achievement has been as low as 51.5% in the 10th Plan
  • The shortfall of peak power has been 8-12% in the last decade.
  • Over 40% of Indian population still don’t have access to electricity
Power Finance Corp - FPO

Capacity addition – Power

Power Finance Corp  – Description and Profile

  • PFC is a firm that funds and stimulates power generation capacity in India. It is a Navaratna PSU registered as a NBFC with ‘Infrastructure Finance Company’ status.
  • PFC has a market share of about 20% in the Indian power lending industry, across all entities, NBFCs/ Banks, private/ public, and Indian/ MNCs.
  • PFC lends to a number of power generation firms, and is a nodal agency for Ultra Mega Power Projects (UMPPs), and the R-APDRP program (Restructured Accelerated Power Development and Reform Program), and for  other government driven power initiatives
  • It also lends to related sectors like Transmission Projects and Distribution, and runs the DRUM program (Distribution Reforms, Upgrades & Management).

PFC Stock evaluation, performance and returns

  • PFC first got listed in a Jan 2007 IPO, and got oversubscribed by 75 times; and the IPO price was set at Rs 85.
  • Investors in the Jan 2007 IPO of PFC have earned a 22% CAGR return to date
Power Finance Corp - FPO

PFC investor Returns

  • PFC has certainly outperformed the NIFTY since it’s IPO.
Power finance Corp - FPO

PFC has outperformed the Nifty

  • Key financial metrics of PFC are showing a steady uptrend
Power Finance Corp - FPO

PFC – financial snapshot

  • Quarterly profits are showing steady growth (except the last quarter)
Power Finance Corp - FPO

PFC – Income and Profits

Lending to Power sector

  • PFC is a nodal agency to facilitate implementation of Ultra Mega Power Projects; these have a capacity of 4,000 MW. PFC charges consultation fee of Rs 15 crores for accomplishing the legal approvals and consultation for a UMPP, thus acting as a one-stop solution provider.
  • The Ministry of Power, Govt. of India has launched the Restructured Accelerated Power Development and Reform Program (RAPDRP) in July 2008 with focus on establishment of base line data and fixation of accountability, and reduction of AT&C losses through strengthening and up-gradation of transmission and distribution network and adoption of information technology during XI plan.
Power Finance Corp - FPO

PFC – Asset and Borrower profiles

  • On the Assets side, PFC is primarily into Generation; the borrowers are mostly State Government bodies
  • PFC is allowed to raise tax-free retail bonds; this has allowed it access to lower cost capital.
  • PFC’s loan book grew at an annualized rate of 22.8 per cent over the period FY06 – FY11
  • PFC is also analyzing entry into funding for Nuclear Power plants.

FPO Offer:

  • The price band is fixed between Rs 193 – 203 per equity share. The offer will be open from May 10-13.
  • Retail investors are offered a discount of 5 per cent in the issue price
  • The IPO will raise funds of Rs 4400 – 4,700 crores at the lower and upper ends of the price band.
  • The follow-on public offer (FPO) comprises a fresh issue of 17.21 crore equity shares by the company and an offer for sale of 5.73 crore equity shares by the Government of India. Currently Government holds 89%. The FPO would result into equity dilution of 14.99%.
  • The purpose of the IPO is to
  • Help PFC keep capital adequacy ratio at 15% over the next few years – it has fallen to 16% now after the lending operations of this year.
  • Strengthen the Balance sheet
  • At the upper end of FPO pricing, of Rs 203,
  • P/E will be 8.9 times (Industry average is 12.2)
  • P/B will be 1.88 times
  • Dividend rate will be 2.2% – fair returns, and note that dividend payout will continue to increase
  • Note that Retail may be allotted at 5% below 193 – that makes it quite attractive.

Risks:

  • Power generation project execution: This was the primary risk a few years ago, with delays and technology challenges. But of late with the opening up to the Private sector, the execution capabilities are improving
  • Power generation operations – Electricity payments from SEBs. The State Electricity Boards – SEBs cash losses have risen from Rs 6,500 crores in 2006-07 to Rs 28,400 crores in 2008-09. This may affect the payments to electricity plants, which in turn can affect PFC. However SEBs are undergoing restructuring in the States, and these should emerge stronger over the next few years
  • Power generation operations – Fuel supply linkages
  • Most power generation projects have Coal as fuel. Coal is generally supplied by Coal India Ltd. – which has not been able to meet production targets in recent quarters.
  • There have also been supply chain issues with coal – such as inability of Indian Railways to handle transportation.
  • Coal is also being supplied from Australia. This supply got affected recently due to floods there.
  • The fuel supply risks are being addressed in new projects by long term commitments from suppliers for new power generation projects.
  • While PFC’s gross and net NPAs have remained negligible in the last five years, defaults – it does not make provisions for loans turning bad – and higher credit costs could impact its balance sheet and earnings.

Opinion, Outlook and Recommendation

  •  India is a power deficit country and the current growth path will require continued capacity additions and efficiency improvements for foreseeable future.
  • PFC will see it’s role expanding for facilitating and funding power sector projects
  • PFC is another monopoly PSU and will execute on government objectives, in an assured returns environment.
  • The Indian government continues to offer PSUs at attractive valuations in public offerings
  • PFC can be a Core holding in the Core – Satellite portfolio for investors.
  • The current FPO offer is at 52 week low of market price. The fall in share price by 45% from the Oct 2010 peak has made current valuations attractive. This reduces the risk of the asset at this price.
  • Watch for subscription data till May 12th to get a better idea of allotments – or even better, check back on this website www.jainmatrix.com for updates :-)
  • Do you find this report useful? Please comment below. You can also subscribe for my posts by filling the ‘Sign me up’ box on top right of this page.

Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Also see: https://jainmatrix.wordpress.com/disclaimer/
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Muthoot Finance Limited – IPO (18-21st April 2011)

6 Comments

Update on April 20th

  • Muthoot Finance got over subscribed 7.09 times till today. The IPO closed today for QIB bidders and tomorrow for retail and HNI.
  • Of the categories, the QIB portion was subscribed 25 times; HNI 0.98 times and Retail 1.34 times
  • This indicates a likely surge tomorrow in the latter two categories.
  • The Maximum Subscription Amount for Retail Investor is now Rs 2,00,000
  • For Retail, if you want to maximise your subscription, bid for 1120 shares at cut off (likely 175) for an investment of Rs 1,96,000
  • Good luck !!

Business Profile

  • Kerala-based Muthoot Finance is a non-deposit taking, non-banking finance company with a focus on Loans against Gold
  • Primary Product – Small consumer Loan against gold (jewellery/ coins) as collateral. As per the company, the maximum tenure for a gold loan is one year, while the average tenure is three to six months.
  • The cost of borrowing is 9.5% (may increase by 1% soon), while their loans start at 12%.
  • Muthoot’s network stands at 2500+ branches across India employing 15000+ persons.
  • The market is large because Muthoot falls somewhere between a microfinance firm and a traditional bank, in terms of loan size and consumer profile. It is exploiting the customer’s gradual shift from pawnbrokers to organised lenders
  • At the same time, having Gold as collateral for personal loans provides for a low risk model to Muthoot, comparable to Home loans. Other loan categories are riskier.

Snapshot of key financial parameters

Muthoot Finance IPO

(click on graph above to expand)

USP of Muthoot

  • Market leader in Gold Loans (click on graph below to expand)
Muthoot Finance IPO

Chart 2: Market shares in % of Industry

  • The loan-to-value ratio for a 22 carat jewellery piece typically varies from 55- 65% for banks while it increases to 70 – 80% for NBFCs like Muthoot.
  • High brand recall due to recent ad campaigns and high visibility branch locations.
  • There are very few Gold loan only players – listed Mannapuram General Finance comes to mind. Most other players are Banks, and NBFCs having a broader loan portfolio. In that sense, Muthoot is a leader.
  • Gold loan market shares: NBFCs are rapidly growing their market share of the Gold Loan market (click on graph below to expand)
Muthoot Finance IPO

Chart 3: Growth of NBFC market share in Gold Loans

  • Growth Potential – Muthoot’s gold loan book of Rs 13,000 crores (Nov 2010), is expected to grow by Rs 10,000 crores in one year.
  • As of November 2010, Muthoot holds 97 tonnes of gold. NBFC sources estimate the gold held by households in India at 20,000 tonnes out of which 10% (2,000T) is held by lenders across the country. Of this 10%, only 25% (500T) is with the organised players like NBFCs and banks. So there is visible potential for this organised market to grow.
  • Gold Prices have been on an upswing. This helps the gold held as collateral for loans to appreciate in value. This lowers Muthoot’s collateral risks. (click on graph below to expand)
Muthoot Finance IPO

Chart 4: Gold Prices over last five years

  • However, if Gold prices fall, the risks will increase, along with possibly default rates

Negatives/ Challenges/ Concerns

  • A recent RBI directive says that bank credit to NBFCs for giving loans against gold jewellery will not be treated as exposure to priority sector. This will raise Muthoot’s cost of funds by 50 to 100 basis points.
  • For the past three fiscals, Muthoot Finance had negative net cash flows. This is unhealthy. The company explains in its RHP that it is primarily on account of high growth in borrowing under financing activities for the purpose of lending under operating activities.  But also Muthoot is investing heavily in additional branches and employees.
  • There are a number of civil, criminal, consumer, and tax cases by and against Muthoot and group companies. One pending in the SC is related to the Kerala Money Lender’s Act (KML). Any adverse ruling here can curb operations in Kerala.
  • Muthoot Finance has agreed to sizeable royalty payments to promoters for the Brand.
  • There are also anti-dilution guarantees provided to four institutional investors – Baring, Matrix, Wellcome, & Kotak – these are concerns left unaddressed.
  • Complex web of 55 Promoter group companies are mentioned in the RHP. Some are in similar or related businesses. There is no clear future path on conflict of interest, M&A by promoters, etc.
  • As a single sector focus player in Gold loans, Muthoot is exposed to several risks:
  1. Fall in price of Gold. This is not expected in the immediate future, but in a 3-5 year period, there may be a sharp appreciation followed by a sharp fall in prices. This can expose Muthoot to a collateral risk.
  2. As Banks and other NBFCs note the high growth in Gold loans, they will also become aggressive in this sector, and competition will intensify

IPO offering, Valuations and Investment Advice

Offering

  • The IPO pricing of Rs 160-175 per share will help raise Rs 824-910 crores, on sale of 13.85% of the equity capital, valuing the firm at over Rs 6000 crores (lower end)
  • The IPO opens April 18, and closes on April 20 for QIB and April 21 for retail and HNI
  • ICRA graded it ‘IPO Grade 4′ – above average fundamentals; Crisil also graded “4/5”
  • The IPO proceeds will be utilised to meet the company’s capital adequacy norms (>15%) in the future, funding of loans and for general corporate purposes.
  • 7% of the equity capital is held by PE players like Baring India, Matrix Partners, Kotak India PE Fund and Wellcome Trust.

Valuations comparison

Muthoot Finance IPO

Chart 5: Valuations comparison (JainMatrix projections & graphics)

Conclusion and Investment Advice

  • The issue is a High Risk and potentially High Gain offering
  • There should be a good listing due to leadership position, fair valuations and high growth
  • Invest for 1-2 years. If Muthoot broad bases it’s business using it’s strong brand and reach, and simplifies it’s organization/ promoter group companies, it can sustain and extend it’s market position
  • Check back on this website www.jainmatrix.com for updates  :-)
  • Do you find this report useful? Please comment below. You can also subscribe for my posts by filling the ‘Sign me up’ box on top right of this page.

Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Also see: https://jainmatrix.wordpress.com/disclaimer/

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